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Sentiment Among Global CFOs Shows Positive Signs

If positive sentiments are contagious, CFOs have caught the fever. Based on the latest edition of Global CFO Signals,a report from Deloitte Touche Tohmatsu Limited, finance executives worldwide seem to be embracing recovery and setting their sights on expansion, despite continued economic hiccups (for example, the threat of a U.S. government shutdown and political turmoil in the Middle East). In fact, CFOs in many of the 17 countries and regions reporting share not only increased optimism in the third quarter, but also increased action. Indeed, in the U.K., business confidence is apparent in the appetite for corporate risk: a record 54% of CFOs say now is a good time to take risk onto their balance sheets.

For the fifth consecutive quarter, optimism among U.K. CFOs rose and is now running close to a three-year high. In Belgium, where CFO optimism is the highest in three years, only 17% of CFOs now expect a recession in the next two years (down from 33% last quarter). And even in Spain, where negative economic news has been routine, the percentage of CFOs who are optimistic (40%) is the largest since the launch of the survey.

That optimism is spilling over to many CFOs’ expectations. In Switzerland, for example, more CFOs expect margins to increase rather than decrease for the first time since 2011. Some 58% of Austria’s CFOs expect increased revenue in the next quarter. And 85% of Southern Africa’s CFOs believe that 2014 will bring about company performance improvement.

The trend is not universal, of course. In North America, CFOs are not allowing their still-positive outlook to translate into increased expectations. In fact, sales growth expectations fell to just 5%* and earnings growth hit a new low of 8%*. There are a few outliers in Europe, too: in Norway, net optimism fell into negative territory (-3%) compared with six months ago, fuelled by poor expectations in retail, and in Ireland, it fell for the first time in 2013 from a net 36% in Q2 to 28%.

Still, overall, CFOs seem to be moving forward undeterred. M&A activity is expected to be up in such countries as France, the Netherlands and Sweden. Three-quarters of Ireland’s CFOs describe their strategy as expansionary, as do 40% of the U.K.’s CFOs. And the percentage of Australia’s CFOs looking to expand into new markets or introduce new products/services rose from 47% to 64%. Given the economic setbacks CFOs have experienced recently, who could blame them for leveraging the current “stability” to the fullest extent and seeking their own remedies wherever possible?

A Synopsis of Sentiment by Geography

Europe

The fears over a breakup in the European Union have been replaced by a palpable mood of confidence in much of the region. Business confidence is apparent in the appetite for corporate risk in the U.K., with a record 54% of CFOs saying now is a good time to take risk onto their balance sheets. More than 50% of Sweden’s CFOs are predicting greater M&A activity as do 75% of French CFOs. Meanwhile, in Switzerland, where 72% of CFOs expect revenues to increase, they also report a positive outlook toward hiring for the first time since 2011. And even in Ireland, where CFO optimism dropped, a majority of CFOs believe their companies and the Irish economy have already turned to growth.

Asia-Pacific

The Australian survey reflects the difference an election can have on CFOs’ outlooks. Last quarter, CFO optimism was the lowest since the survey began. In the wake of the September election of the conservative Liberal Party-led coalition, however, optimism rebounded to its highest level in two-and-a-half years. And that confidence is driving a rise in operating margins, operating cash flow, cash holdings, head count and capital expenditures. Moreover, Australia’s CFOs are also confident enough to adopt more aggressive strategies. In addition to their push for new products and services, the proportion of CFOs expecting greater organic expansion rose to 76% from 63% last quarter.

The Americas

In North America, 42% of CFOs express improved optimism about their companies’ prospects, compared with 24% who express pessimism. A key reason for continued optimism is that most companies surveyed derive a large portion of their earnings from North America, the region’s relative bright spot. In fact, 38% of CFOs rate the region’s economic health as more good than bad (up from 30%), and just 9% rate it as more bad than good. Moreover, more than half expect the economy to be stronger in a year. By comparison, only 26% regard China’s economy as good, and just 27% expect it to be better in a year; the numbers are 3% and 14%, respectively, for Europe.

Africa

In Southern Africa, the majority of CFOs view their own company performance as improved. In fact, only 31% of South Africa’s CFOs and 16% of other Southern African CFOs report that performance has deteriorated in the past year. At the same time Southern Africa’s CFOs are expecting healthy economic growth (5%-5.8%) in the region. And while many CFOs are focused on defensive strategies, there is still a reasonable degree of openness to new opportunities: some 43% of South Africa’s CFOs are prioritizing investment in new capacity, as well as 46% in the rest of the region.

Middle East

Finally, in the Middle East, ongoing political uncertainties drove CFO optimism down this past year (although it remains quite positive). That optimism is also beginning to bifurcate countries in the region. Optimism among surveyed CFOs in Syria fell by 13%, while finance chiefs in the UAE reported a net 75% increase. While CFOs in the region reported improved expectations for revenues, capital spending and hiring over the coming 12 months, the number reporting so is 38% less than a year ago, reflecting less confidence in their outlooks.

CFO Priorities: What Matters Globally Now

Taming Uncertainty

Uncertainty has been a constant companion for many quarters now. The concern over uncertainty, though, seems to have dissipated in many countries, as CFOs have learned to cope with it. In Ireland, for example, only 12% of CFOs indicate that the level of external financial and economic uncertainty facing their business is high or very high, down from 59% last quarter. In the U.K., 62% of CFOs see the level of uncertainty as above normal, down from 97% two years ago. And in Belgium, the percentage of CFOs rating the level as high or very high has decreased from 53% to 26% over the past 15 months. Still, in Australia, uncertainty remains generally high, and more than half of CFOs expect that to remain the case for at least another year. But what if the uncertainty turns into a crisis? In Austria, it seems CFOs take that possibility in stride: some 54% of surveyed CFOs believe they are well equipped to handle another financial crisis, and 7% think they are very well equipped. Moreover, when asked about their companies’ business-continuity plans, one in four CFOs in the Middle East said they still did not have a plan in place despite the increased instability in the region. How is that for confidence?

No Place Like Home

When it comes to how they see growth prospects, CFOs often view them through a fairly parochial lens. For example, the U.K.’s CFOs believe that growth in their region will have a more positive effect on their investment plans in the next year than growth in emerging markets or in the U.S., Japan and Asia-Pacific. Sweden’s CFOs expect the best opportunities for growth in the Nordic region. And in the Middle East, CFOs favor expansion in their own region over other parts of the world. Meanwhile, 87% of Switzerland’s CFOs see their home country as an attractive business location, and 70% of North America’s CFOs say economic growth in North America is a top growth engine, more than twice the level of all the other markets combined. CFOs would feel even better about their home countries, however, if governments would heed their advice. Australia’s CFOs, for example, believe the key priorities for their new government should include tax reform, building confidence and stability, and reducing red tape. In Ireland, all respondents believe the government should seek an enhanced credit line from the European Stability Mechanism permanent bailout fund once the country has exited the bailout program. And 75% of CFOs in Southern Africa listed corruption as one of their top five political concerns, indicating growing discontent with governments’ efforts to stamp out such malfeasance.

Employment Inches Forward

After so many quarters of stagnating employment expectations, any movement on that front has to be viewed as good news. In the U.K., hiring expectations have hit a three-year high. Elsewhere, 23% of Austria’s CFOs want to increase their staffing levels in the next few months, up from 15% last quarter. And in Switzerland there is a positive trend in hiring, up 5%, for the first time since 2011. Of course, there may not be a correlation between employment levels and CFO optimism. In Norway, for example, where unemployment remains low and the 2013 prognosis is for 3.6% unemployment, according to Statistics Norway, CFO optimism plummeted in the third quarter. Still, a case can be made that staffing levels and the lack of adequate resources are, in one way or another, stress factors for CFOs. In Southern Africa, for example, CFOs listed “excessive workload, roles and responsibilities” and “insufficient support staff” as two of their top three job stressors, highlighting the general skills shortages in Africa and the need for ongoing efforts to enhance education and training on the continent.

Embracing the Role of Strategist

In an environment in which companies must constantly adapt and respond to changes quickly, CFOs are increasingly playing the role of strategist, participating in decision making and strengthening their relationship with their CEOs.

In Spain, for example, CFOs report that their main challenge internally is “to influence business strategy and operational priorities,” more so than “ensuring funding, liquidity and an acceptable cost of capital.” Meanwhile, Argentina’s CFOs are allocating 25% of their time to the strategist role, up from 23% in the last survey. And it is safe to say that CFOs in many countries have had to green-light the switch from defensive to expansionary strategies. But what does taking on the role of strategist actually mean in practice? That was a question put to North America’s CFOs, who noted that they have an increasing voice in strategic decisions—especially in “corporate” or “cross-unit” decisions. In fact, when CFOs claim a lesser voice in a particular type of decision, it is usually because they are leading the decision-making process and presumably providing objective rather than subjective insight.

*All numbers with asterisks are averages that have been adjusted to eliminate the effects of stark outliers.

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